James Glover is back with another guest post, this time digging into some poll figures ahead of the postal plebiscite on same sex marriage.

Hey, there is a survey/plebiscite/referendum on, in case you haven’t heard. It’s on same sex marriage or marriage equality. Leaving aside the fact that this is a survey and not at all binding on MPs, this post is not about the rights and wrongs of SSM but about how to interpret the results of a recent Newspoll. Unlike most Western democracies voting in Australian elections is compulsory but as this is voluntary we are left with the additional problem for psephologists of determining not just how people would vote but whether they feel strongly enough to vote. The Newspoll produced two sets of results. The familiar one of whether people supported SSM or not, but also whether they intended to send in their postal surveys. Strangely enough they didn’t include information on the voting intentions of those who actually intend to vote.

So I made a spreadsheet model to try to determine some possible outcomes and what were the real drivers of the result based on what we gleaned from Newpoll but with some possibilities of one side or the other getting more people out to vote and the underlying vote being skewed towards the “Yes” vote. We know from dozens of polls going back 10 years that the majority of people, when asked, support the general notion of SSM. The results are usually in the range 60-70% in favour, 15-25% against and about 15% undecided. Newspoll has the overall level of support at 65%, about in the middle of that range. And if the ABS, who are conducting the survey, were to conduct a statistically significant poll they would almost certainly (the probability theorists technical get out statement) say a clear majority support it. Game over. Surely?

But there are other factors coming into play here. Here is a table of the Newspoll results by age, probably the most significant determinant, outside political views, of whether they support, or not, SSM.

Support for SSM by Age

18-34

35-49

50-64

65+

Overall

Yes

70

64

64

49

62

No

22

28

30

47

32

Undecided

8

8

6

4

6

AEC enrolled population

4,271,289

4,271,290

4,271,291

4,271,292

17,085,162

To determine the ”overall” figure, and what I will refer to as the “voting population”, I am using the AEC’s own figures on people enrolled to vote, as of June 2017, which is the last line.

As has been noted support for SSM decreases with age. But the number of people in each age cohort is about the same. The overall figure for support of 62% is towards the bottom end of most surveys but let’s leave it at that.

The Newspoll also provide figures on whether people actually intend to return their surveys.

Intention to vote

18-34

35-49

50-64

65+

Overall

Definitely will vote

58

64

73

76

68

Probably will

19

16

11

11

14

May or may not

12

9

8

8

9

Probably won't

4

5

3

2

3

Definitely won't

3

5

3

2

3

Uncommitted

4

1

2

1

2

One obvious thing to note is that older people, who are also more likely to vote “No” are more likely to vote. That will skew the results towards the “No” case.

But polls two months out may not reflect the final vote as happened in the recent US and UK elections, and support for the “Yes” case may soften. And the “No” case is probably doing a lot more to ensure they get as high a turnout as possible. So, in my model, on a spreadsheet of course, I included some assumptions and variable inputs which are:

I assume all people who say they definitely will vote is 100%.

“Probably will vote” is an input

“May or may not vote” is an input

Probably won’t, definitely won’t and uncommitted is set at 0%

Turnout for the “No vote”. Based on the polulation figures the turnout, overall should be about 83%. So one input is the turnout for “No vote” assuming they make more of an effort to get their supporters out to vote. The turnout for the “Yes” vote is then deducted from this number to match the overall turnout, 83%, by age group so higher turnout for “No” automatically leads to a lower turnout for “Yes”.

For people who will claim that the “Yes” poll result is exaggerated and is actually lower, or will soften closer to the closing date I have included an adjustment term. So “-5” means I have reduced the polled support for “Yes” by 5% making it 57% rather than 62%.

Splitting the “undecided” vote between “Yes” and “No”. “P” means I have allocated it proportionally to the level of support, but there is a parameter which splits it, say, 25% to “Yes” and therefore 75% to “No”.

So the results? Well here they are:

﻿Summary

BCS

Exp S

RWCS

WCS

% "probably will vote" who do vote

75%

75%

50%

25%

% "may or may not" who vote

50%

50%

32%

0%

"No" vote turnout

P

95%

95%

100%

undecided split to "Yes" vote

P

P

30%

0%

adjust yes vote

0

0

-5

-5

Vote Yes

66%

62%

50%

40%

Vote No

34%

38%

50%

60%

Support Yes

67%

67%

59%

57%

Support No

33%

33%

41%

43%

Overall turnout

84%

84%

78%

71%

Yes turnout

83%

78%

67%

50%

No turnout

85%

95%

95%

100%

Population Yes vote

56%

52%

39%

28%

Population No vote

28%

32%

39%

43%

There is good news, and bad news, depending on your viewpoint. My own view is a “Yes” vote is a good thing but if you feel otherwise feel free to substitute “Best” for “Worst” in the above table. So here are the 5 scenarios. Note that once you fix the “No vote” intention to vote at, say, 95%, you remove people who intend to vote “Yes” in order to keep the Newspoll and AEC derived figure of 83% intending to vote.

BCS – Best Case Scenario. Based on the Newspoll numbers I have split the intention to vote and undecided vote equally among “Yes” and “No” voters. I have also assumed 75% of the “Probably will vote” and 50%” of the May or may not” voters will vote. The result is a clear win 66:34 for the “Yes case”. Also the overall number of people voting “Yes” is 56% of the voting eligible population so hard to argue this isn’t a decisive result.

Expected – I am assuming that the people on the “No” case will be better at getting people out to vote than the “Yes” case, 95% of them. Here there is still a clear win for “Yes” at 62%. And overall that represents 52% of the population. A clear win for “Yes” on the vote and over 50% of the population vote “Yes” as well.

RWSC – Reasonable Worst Case Scenario. This is a term that I (and the Mule) picked up in our early days at DB to describe a scenario which assumes negative (from my point of view) parameters that could nonetheless be possible. Here I am assuming only 50% of probably wills and 33% of may or may not’s vote. Because I have fixed the “No” voting rate at 95% this leads to less “Yes” votes” to keep the overall participation rate at 83%. Here the result is a line ball at 50:50. It could go either way. The population “Yes” vote is close to 40% so people might argue that less than 50% vote “Yes” and hence conservative MPs shouldn’t take the result as definitive.

WCS – Worst case scenario. Only 25% of the maybe votes and none of the may or may nots vote and 100% of the “No” votes do. I’ve reduced the support for the “Yes” case by 5%. All undecideds get allocated to “No”. Despite the overall support being 57:43 in favour of “Yes” the actual vote goes 40:60 in favour of “No”. And the overall population vote is 43:28 in “No”s favour. Under these circumstances the PM has said the vote for SSM won’t come to parliament. Largely this is driven by the 100% turnout for “No” and only 50% turnout for “Yes” as well as softening of support for “Yes” and undecideds voting “No”. This is the result the “No” campaign will be, literally in some cases, praying for as it will be difficult for the Opposition and proponents of SSM to argue the issue hasn’t been settled for the time being.

My own guess? It will be 55:45 in favour of “Yes” with overall support at 65:35. That will be enough for the anti SSM lobby to say support was never as high as the “Yes” camp claimed. But a win is a win and only the most devout glitter sellers won’t be running out of stock by Xmas.

Extra: How do I think the ABS should actually conduct this poll? Not by post for a start. There are 150 electorates and one of the arguments against using results from 1,400 people is that it barely samples many of those, less than 10 people is some cases. In actual fact the mathematical 95% margin of error for sampling N people is (approximately) 1/sqrt(N) or for N=1400, 2.67%. So the overall sample size is sufficient if the result is 60:40. But to give everyone the feeling their voice and their neighbour’s voice is being heard how about sampling 150,000 people? That is 800 people in Australia’s smallest electorate, Kalgoorlie. The MoE by individual electorates would be better than +-3.5% and over the whole Australian voting population 0.25%. And it would only cost $10m. It might even become a regular thing.

The father of the Mule is currently in the UK and penned the following piece as he reflected on the outcome of the election. With the speed of the election cycle, the election results may already seem a distant memory, but any tardiness in publishing this post is entirely due to a slow editor (me) rather than late filing!

The only word to describe Theresa May’s unnecessary recent decision to call an early election in Britain is “hubris” and that hubris has now led to irremediable humiliation. “Strong and stable” could have described her political position before the election, but as a campaign slogan, delivered with numbingly motoric repetition, it became risible as “Jobson Growth” had been in Australia last year.

Beyond May’s trouncing, the election has also invalidated many British political verities: “Young people don’t turn out to vote” is, probably, the most significant of them and this is a healthy reminder that the future is theirs not (as with the referendum in 2016) that of the frightened older generation. Politics is more than the “reality” of hard-headed professionals; it is about hopes and dreams. Young people rightly have those; we oldsters have largely lost them. Ironically Jeremy Corbyn revealed a striking ability to combine the use of modern social media with old-fashioned mass rallies to persuade the young, especially women, to listen and to support them in their yearning for a better future. As a result, the overall voting turn-out (69%) was the highest since 1997 and exit-polls indicated that the increase was 12% amongst the under-35s. A post-election poll of over 50,000 people showed that the age cross-over in voting preferences occurs at 47, with increasing Labour support below that, reaching over 60% in those younger than 30.

Another challenge to conventional wisdom is that it is now accepted that threats to “law-and order” such as the recent terror attacks, no longer seem to favour right-wing parties. There may be a resonance in this for Australia.

For those of us who love data, consider the vote in Corbyn’s own constituency of Islington North: he won in 2015 with a 60.24% of the vote and a majority of 21,194; this year his vote was 72.98% and the majority 33,215. By contrast, consider Canterbury, amidst a sea of Conservative blue in the south-east, where a Tory ascendancy of more than 150 years has been turned from a 9,798 win in 2015 to a Labour majority of 187 (in a swing of 9.33%). Significantly, it is a university city.

The house next to where I am staying in London, displayed a “Vote Labour” poster, and vote Labour the constituency did, with a 30,509 majority for the member Keir Starmer, the former DPP and human rights lawyer. In fact, London (with 49 Labour seats, a gain of 4, to the Conservatives’ 21, a loss of 5), remains an astonishing Labour stronghold.

The overall national vote for Labour was 39.98%, very close to the 41% of the 2001 “landslide” for Tony Blair. This secured them 261 seats (a gain of 31 seats) compared to 318 to the Conservatives (with 42.45% of the vote and a loss of 12 seats).

But the traumas were for more than for the Conservatives alone. North of the River Tweed the Scottish National party has been reduced to 35 seats (a fall from 50% support in 2015 to 35% this time, at a cost of 19 seats). Another independence referendum there now looks pretty unlikely. The other loser – unsurprising, perhaps, because the 2016 “Brexit” rather pricked its balloon, leaving it “a rebel without a cause” – was UKIP (the “UK Independence Party”) which fell, overall, from about 13% to less than 2% of the vote, leading to the immediate resignation of Paul Nuttall, its third leader in a year after Nigel Farrage’s retirement; Nuttall finished an ignominious third (with only 3,300 votes) in the constituency which he contested.

So where does this leave the hapless Theresa May? And, more important, where does it leave Britain – without a plausible government and the Brexit negotiations looming within days? She has been looking weak and opportunistic in seeking a “deal” of sorts with the members of the so-called Democratic Unionist Party from Ulster (one of whom is the son of the Rev Ian Paisley), “our friends” as some shameless Tories have been calling them. She will find them uncomfortable allies, with special interests as well as regional and sectarian concerns. When a former Conservative PM strongly criticises this deal, as John Major did on radio a few days after the election, the political right looks as fractured as Britain, itself.

Yet, oblivious to all of that, May returned from an interview with the Queen on Friday 9 June and made a speech saying, “The government I lead will put fairness and opportunity at the heart of everything we do”, as if the Corbyn ethos and campaign hadn’t existed, and all of that would happen “over the next five years”. She appears to be the only person in the country who thinks that she can last even 5 months, let alone five years. Ever since the shock of election night, numerous members of her party have been trenchantly critical of her campaign and, no less importantly, of her performance as PM. Her two vilified senior advisers promptly resigned; it was as if, somehow, they were to blame because she listened to them so exclusively and ignored everyone else. Somehow the reality was forgotten that consequences flow from accepting advice: a politician (like everyone else) has the freedom to reject it. For example, I saw one former minister say that “Mrs May must now obviously consider her position after a dreadful campaign.” And a former Cabinet Secretary (Lord Turnbull) bluntly said that May “isn’t up to it……she doesn’t have the skill-set to be Prime Minister….and should resign”. May has prodigally thrown away her limited political capital, most likely having over-estimated it from the beginning.

Of course, the British political and historical perspective is limited. They seem to have a fierce aversion to coalition governments and hung parliaments (though te PM seems the one being hung this time) and fail to understand that such arrangements are the norm in many other successful (even “strong and stable”) societies. That word “hubris” comes to mind again. Meanwhile, as the political classes fret intensely, life for everyone else goes on: the fickle weather alternates between sunshine and bleakness, it’s still possible to do research in libraries and archives; there are still fine exhibitions to be visited. And there will be a record number of women in the Commons – more than 200. So there’s always a bright side in politics – we just need to look properly.

After observing the Brexit poll at close quarters, guest Mule contributor John Carmody travelled on to Europe and continued to reflect on the significance of the vote. In this follow-up post he reflects on the historical journey of the European Union and his reasons for thinking that the Leave vote was a terrible mistake on the part of British voters.

I have also continued to reflect on the vote and have arrived at a similar conclusion for different reasons. I do have some sympathy for some of the political sovereignty arguments for Leave (although not those based on Farage and UKIP xenophobia), but I still think that Remain is the better option. The best analogy I have come up with is someone regretting the decision to get a large tattoo. While it may have been better never to have had the tattoo, removal can be painful and leave an ugly scar. In the same way, Britain does not have the option to wind back the clock and eradicate the last 40 years of history: it did join the Union and an exit will lead to a very different Britain. There is no way to transition to a counterfactual Britain that never joined back in 1973 and had developed its own trade agreements, human rights legislation, environmental legislation, funded all of its own infrastructure, scientific research, etc, etc. Exit will be painful and, even if joining in the first place was a mistake as some would argue, leaving will be worse.

But back to the guest post…and I would be interested in reactions to this post, so please post your thoughts in the comments.

As with beauty, the rights and wrongs of the British “Brexit” vote will lie in the eye (or the prejudices) of the beholder. Certainly, innumerable words are still being deployed about it, though many of them (notably, but certainly not exclusively, in Britain) are rather self-interested or poorly informed. I believe that the Anglophone world, in general (including in Australia), has a poor understanding of the structure and operations of the European Union and a fortiori of its genesis in the fraught history of Europe, since the Reformation.

It is in part a historical institution and in part a philosophical one. It has grown from the fraught history of European religious, territorial and mercantile wars as well as the growing sense, notably in the twentieth century, if the “idea” of Europe. As an island (even insular) nation which has not been successfully invaded since 1066, Britain has played only a sporadic often simply self-interested part in those developments. And Australia, influenced so powerfully by Britain (as, indeed, it still is) shares much of that ignorance of European history and thought.

Experience commonly determines understanding. As time passes and people forget or, without that lived experience of adversity, become complacent (especially, in this specific case, about Europe’s peace since 1945): it is the serious responsibility of politicians, as well as teachers and journalists, to impart this knowledge. Even writers in the International New York Times, who ought to understand a federation, use such demeaning words as “bloc” or “imperfect union”—as if the USA is any different in its fallibility. Of course, the EU is “imperfect”: it is (like every human institution) “a work in progress”; but commentators need to acknowledge that it has made astonishing progress. Of course, for a diversity of reason (not the least of which is language) it is not as mature a federation as those of the US and Australia, but in fields as diverse as health and the environment, education and agriculture, for example, it has transformed Europe. There is, for all its limitations, a far greater sense of a European identity than when I first went there 40 years ago.

Regrettably, for years, journalists and politicians—in particular those in Britain (and hence in Australia, because our journalists are essentially compacts)—have failed in their responsibility to inform, rather than manipulate, their constituencies. In fact, it has often seemed that they were determined, for their own partisan interests, to misinform and profit from prejudice — especially in that recent “Brexit” campaign. Australians are all too familiar with some of this behaviour: we have seen many comparable instances when our politicians have engaged in what is called the “blame game” between the states and Canberra. Thus, British politicians have blamed “Brussels” for decisions which were democratically made in the European Parliament, even when they were elected members of it and they actually voted for the contended measures.

All too frequently the talk is about some sort of opaque and unaccountable bureaucracy, whereas the truth is (as I have been advised by well-informed lawyers) that the administration exercised by the European Commission (as that civil service is called) is pretty lean, and smaller than pertains even in some of the larger cities in Europe. Furthermore, is it overseen by two levels of representative oversight. Contrary to what many in Britain believe, or are told to believe, this Commission does not control Europe, any more than the public service in Whitehall “controls” the United Kingdom or the Canberra bureaucracy “controls” Australia. That authority is exercised, jointly, by the Councils of Ministers and the European Parliament. Those several Councils are composed of the relevant Ministers from the legislatures of the constituent countries of the EU, all of whom are accountable to their home Parliaments and electorates. The European Parliament is made up of directly elected members and is, therefore, no less democratic a body that the House of Commons (and it is decidedly more democratic and representative than the House of Lords). Of course, as happened with Federation in Australia, when the uniting colonies ceded some powers to the Commonwealth but retained others, this sharing of power is undertaken for a greater good, but it has costs: it is certainly not a “loss of control” as Boris Johnson and his henchmen duplicitously asserted and (either through lack of ability or conviction) David Cameron failed to properly contradict.

That was not the only lie of the recent British referendum. Another was the claim that a vote for “Brexit” would return to the National Health Service an amount of £350 million each week (the asserted, but seriously inflated, figure for the current British payment to the EU budget). Almost as soon as the referendum results were declared, the “Leave” proponents were repudiating that promise. A former Conservative Leader, Iain Duncan Smith, brazenly insisted that “I didn’t say that”, even when he was reminded that the posters and leaflets which his group issued had promised exactly that. His revised promise became, instead, that the NHS would receive “the lion’s share” of whatever was left over after the essential compensation was paid to British farmers for the loss of their substantial subsidies from the EU.

Other falsehoods, though, continued to be promulgated after the referendum. In a column in the Daily Telegraph, Johnson wrote that “there will continue to be free trade, and access to a single market.” In other words, the insular British could continue to have their current cake and eat it too (Johnson once said that this was his “policy”). It was a reiteration of the campaign propaganda—that it was possible, in effect, to remain a member while avoiding all of those inconvenient costs of membership, political and financial. That is utter nonsense. Either Britain is a member or it is not. There is no possibility of being “a little bit pregnant”. The situation of Norway was often mentioned.

But, I am advised that, as a non-member wishing to enjoy free-trade, Norway must pay about 90% of what its contributions would be if were actually a member. Britain would have to pay something comparable if it wanted access to the European market and, given the stern attitudes which, understandably, are currently attributed to such leaders as Dr Merkel and M. Hollande, more attractive rates are highly unlikely. The bitter result for Britain from Johnson’s interpretation of “free access” would be a comparable cost but with absolutely influence on EU laws and policies.

Some Independence Day for Nigel Farage and his “UKIP”! Some “regaining control” for the Colonel Blimps and their powdered ladies of “Middle England”! And even worse prospects for the struggling under classes, especially in the north. Wrongly, they feel neglected by Brussels (the reverse is actually the truth), but, for decades, Westminster has shown little regard for then.

Even if, to other than close observers, the outcome of the poll were unexpected (it had seemed highly likely to me), the heterogeneity of the results – age by age, region by region, class by class—were a harsh reminder of what a fractured county Britain currently is. The “United” part of the name UK, is meaningless. Scotland (68%), Northern Ireland (56%) and London (60%), for example, voted strongly to stay in the EU; much of the rest of England voted to leave (52-58%).

Various analyses have shown that education played an important role. In regions where fewer than 22% of the population have a degree, 62% voted “Out”, but that vote was only 42% where more than 32% of residents have a degree. The age disparities were even more stark. Commercial polling, after the voting closed, showed that 73% of 18-24 year-olds support EU membership but only 40% of those over 65. Those with a future have been trumped by those who may not live to see the promised “independent future”. As a Cambridge colleague recently said to me, “We feel in free-fall”. Many Europeans to whom I have spoken are just as perplexed. Perhaps the real truth was recognised by an astute and experienced Italian journalist, Beppe Severgnini, who wrote, “One should understand that it wasn’t fear, or anger, that brought so many English to vote for Brexit on June 23. It was nostalgia…….nostalgia for a self-sufficient, cosy Little England that is long gone. But they don’t seem to realise that nothing, not even voting to leave the European Union, can bring it back.”

Of course, there were as many individual reasons as there were voters: but in some places there seemed an almost wilful determination – notwithstanding that the rage was probably directed at the wrong target – to inflict self-harm. In some places which depend upon EU finances for their very lives (and certainly their jobs), it ironically became art transformed into life with the “What have the Romans ever done for us?” cry in The Life of Brian turned into “What has Europe ever done for us?” When reality eventually strikes, it will certainly be harsh and those misled communities will feel the greatest pain and social upheaval. Certainly, given the deep and serious rifts in her party—let alone British society at large—the task which faces the new Prime Minister designate, Theresa May is immense.

The voting figures indicate that there are clear political divisions as well. On the day after the vote, the formidable Nicola Sturgeon was unequivocal. As the First Minister in the Scottish Government, she pointed out how strong the “Remain” vote had been north of the Tweed. A new referendum on independence for Scotland, she declared, is certainly “on the table”. Indeed, without Scotland, Britain would shrink to “Little England”, with the serious risk of a crippling reduction in its importance as a financial centre, let alone its potential scientific losses. Furthermore, whether the enduring sectarianism of Northern Island would prove an implacable impediment to some sort of union with the Irish Republic in the south has become a hot topic because, otherwise, their border would also become the British border with the EU and securing it would be an enormous challenge for both sides in every conceivable respect.

Much has been made of the concern that “Brexit” might encourage more breakaway movements. While the focus has been on Madam Le Pen and her National Front in France, or the extreme Rightist party of Geert Wilders in Holland, concern will also be felt about the intentions of such nationalist groups as the Basques and the Catalans. It is ironic that, as the world is supposed to becoming more integrated, notably as electronic communications and transport become ever faster and less expensive, smaller communities and political groups seem so alluring. Currently, this is simply speculation, but to many people (not just politicians) it is troubling just the same.

Even so, the final card may not have been played in Britain. The political and legal power of such a referendum as was recently held there are far from clear in that nation’s diffuse constitution. A corollary of the contemporary rhetoric is that the people want the British Parliament to be supreme. The logical consequence of that aspiration would be that the parliament must make the ultimate decision about whether to act on that slender 52%:48% margin (keeping in mind the principle that a greater majority—say of 66% or even 75%—ought to have been mandated before any radical action was triggered). To deny the people their “choice” might seem politically foolhardy (or, even responsibly statesmanlike); but that it why so many nations have parliaments, rather than frequent national plebiscites.

Yet, legally speaking, the position it far more complicated. It is certainly not a matter of the new British Prime Minister sending a letter to Brussels to trigger exit negotiations. That action, under the terms of membership agreements, requires action by the appropriate law-making bodies in the member country in question: in Britain that it the parliament—it certainly is not the cabinet, let alone the individual PM. So, this can hardly be done – in the legal way which Brussels would require, before Parliament returns from its scheduled summer recess, if only because the required legislation (especially if it is to specify the conditions of the negotiations with the EU in the requisite detail) will be difficult and time-consuming to write and debate.

For all that many are said to be calling for a speedy resolution, it simply cannot occur in a hurry. Lady Macbeth’s wish that the deed should be done quickly might be appealing, but it is not practicable. Patience is less often understood as the political virtue that is should be. Like beauty and its appreciation, it is uneven in its distribution. Sagacity, not seduction, is what is now required on all sides.

Sometime Stubborn Mule contributor, John Carmody, finds himself in the UK at the time of the Brexit vote and has filed the following report. Meanwhile, back here in Australia, the Mule is watching anxiously for signs that we are on the verge of the end of Western civilisation “in it’s entirety”.

On the night before the “Brexit” poll, London had heavy rain with much thunder and lightning: Donner and Blitzen if we want to be Europeans. Later that day London had further downpours with associated disorder with transport and traffic all of which created real difficulties in what was regarded as a “Remain” stronghold. It was very striking to me – having been in London for the past few days, how prominent the “Remain” supporters were on the streets (as was also the case when I visited Cambridge”: the “Leave” supporters were silent and not to be seen there.

Many schools were closed for the day because they were commandeered as places for voting (oddly, the British still vote on Thursdays because, as I’ve been told, that was “Market Day” hundreds of years ago, therefore people “came to town: so much for progress and change here). If the day seemed “business as usual”, I saw some hint of the latent tensions late in the afternoon when I strolled into a polling place in Charing Cross Road. It looked like a second-hand bookshop, and apart from a few officials I was the only person. A prim woman told me that if I “did not have the right piece of paper”, I was not permitted to enter. I protested that I simply wanted to see how the British vote: she said that I might be a terrorist and simply had to leave (so I went to the opera down the road and felt part of a greater reality).

The polling closed at 10.00 pm and, to the television watcher (the coverage was less lively than we’re accustomed to in Australia) the results seemed to be declared rather slowly. But it was different from an election: it was the actual numbers that were crucial and, astonishingly early, the trend became clear. By the end, before 5.00am, it was 52% to leave, with the greatest turnout (72% in a country without compulsory voting) in more than 20 years: the political and financial leadership had been rebuffed and, before 8.30am, standing outside Number 10 in Downing Street, David Cameron – having suffered the fate which, maladroitly, he had brought on himself – announced his resignation. That was inevitable: but, curiously, he will remain as “caretaker” until the party conference in the autumn. The result will be a Tory party that is focussed, not on national problems or the negotiations with the European Union, but with their leadership battles. Not that it is more cheerful for Labour. That party also needs a new leader. Jeremy Corbyn was, plainly, conflicted during this campaign – a “Eurosceptic” he found campaigning with conviction for “Remain” was beyond him and in an interview after the result was clear, he was equivocal, pallid and deemed utterly out of his depth. As with Australia, a big section of the electorate seem to be disillusioned (or worse) with the two political power-blocs.

And if the forthcoming politics seem turbid, it is just as perplexing and concerning for the economy. The immediate result was a fall in the value of the pound and of the stock market fell by 8-10% and we were told, the banking stocks fell by 20-30%, the pound by a margin which has, allegedly not seen since 1985. The Governor of the Bank of England, Mark Carney, made an impressive and emollient speech (which was plainly directed to the markets) but words have a limited utility. The metaphorical economic storm clouds are serious for Britain.
Even the very use of that word seems problematic at present. The country is seriously divided. The out votes were 53% in England, 53% in Wales, 44% in Ulster and 38% in Scotland. No less significant is the fact that whereas certain results were expected (notably with London and the major cities strongly for “Remain”), in traditional Labour areas, notably in the north, there were strong “Leave” votes. Cameron gave the electorate the opportunity to repudiate the government, and they took it; but it was also an expression of “no confidence” in the Opposition.

So there is already serious talk about another independence referendum in Scotland (and even in Northern Ireland); Nicola Sturgeon will clearly feel emboldened. And there is, understandably concern in the European capitals: the talk about Britain not being able to “cherry-pick” the conditions of its exit. The politicians in Brussels and elsewhere do not want to encourage the waverers in the EU.

Meanwhile, though there is much brave talk in Britain – about “reclaiming independence”, or “protecting democracy” or “taking back control” – this is a step into an uncertain future. There’s a wide and exciting world out there, but a timid majority of Britons seem unwilling – or afraid – to want to live in it. It’s their choice, their risk, their lost opportunity. But as a great British writer and Divine once wrote, “No man is an island”.

Has it really been so long since there was a post here on the Mule? It would appear so and my only excuse is that I have been busy (isn’t everyone?). Even now, I have not pulled together a post myself but am once again leaning on the contributions of regular author, James Glover.

From pictures of the transit of Mercury you might think that Mercury is really close to the Sun and that is why it is so hot that lead is molten! In actual fact Mercury is about 0.4 Astronomical Units (AUs) from the Sun (Earth is about 1AU) and only receives about a 7 fold increase in sunlight intensity. So it is hot but not that hot. Mercury is about 40 solar diameters from the Sun. If the Sun were a golf ball then Mercury would be about 6 feet away and the Earth about 15 feet away. On Mercury the Sun subtends an arc of 1.4 degrees compared to 0.6 degrees on Earth.

Pictures of the Moon in front of the Earth seem to have the same effect, to me at least, of making it look much closer than it is, whereas in reality the Moon is about 30 Earth diameters away. Roughly the same “size of larger body to distance of smaller one” ratio as Mercury is from the Sun.

This optical effect (modesty prevents me from giving it a name) seems to occur when photographing one astronomical body over another. It can’t be that we are using the relative sizes as a proxy for distance since Mercury/Sun is very small and Moon/Earth is relatively large. Lacking other visual clues, that a terrestrial photograph might provide, my guess is that we use the diameter of the larger body as a proxy for the distance from the smaller one. Mentally substituting “distance across” for “distance from”. Or maybe it’s just me?

One possible explanation is that there is insufficient information in a 2D photo like this to determine the distance between the objects. But if asked “how far do you think the one in front is from the one behind?” rather than say “I can’t tell”, you choose one of the two pieces of metric information available, or some function of them, such as the average. Perhaps the brain is hardwired to always find an answer, even a wrong one, rather than admit “I don’t know”, “I have no answer” or “I have insufficient information to answer that question, Captain”. That would explain a lot of religion and politics.

It has been a very long time since there has been a post here on the Stubborn Mule. Even now, I have not started writing again myself but have the benefit of a return of regular guest poster, James Glover.

This is a post to explain the Australian Government’s policy called “Direct Action”. I will spare you the usual political diatribe. So here is how it works. The government has $3bn to spend on reducing carbon emissions. At a nominal cost of $15/tonne that could be 200m tonnes of Carbon.

Okay so how does it work? The government conducts a “reverse auction” in which bidders say: “I can reduce carbon emissions by X tonnes at a cost of $Y per tonne”. You work out what is the biggest reduction for the least cost. You apportion that $3bn based on the highest amount of carbon reduction. Easy peasy. That $3bn comes from government spending so ultimately from taxpayers. [Editor’s note: while not directly relevant to the direct action versus trading scheme/tax discussion, I would argue in true Modern Monetary Theory style that the Australian government is not subject to a budget constraint, beyond a self-imposed political one, and funding does not come from tax payers].

As our new PM Malcolm Turnbull says why should you have a problem with this? There is a cost and there is a reduction in carbon emissions. There will always be a cost associated with carbon reduction regardless of the method so what does it matter if this method isn’t quite the same as a Carbon Pricing systems previously advocated by the PM and his Environment Minister Greg Hunt? As long as there is a definite amount, Xm tonnes reduced.

Well here are a few thoughts:

1. if a company is currently making a profit of, say, $500m a year, producing electricity using coal fired power stations then why would they participate in this process? There is no downside. Maybe.

2. Okay it is a bit more subtle than that. Suppose the difference between the cost of producing electricity using coal or renewables works out at $15 a tonne. You might reasonably bid at $16/tonne. In reality there is a large upfront cost of converting. There is a possibility that an alternative energy provider takes that $15/tonne and uses it to subsidise their electricity cost. That could work. That encourages a coal based provider to move to renewables. But so might a coal based electricity provider at $14/tonne to undermine them. What we call a “race to the bottom”.

3. It seems to be an argument about who exactly pays for carbon pollution. Well here is the simple answer: you pay. Who else would? And you pay because, well, you use the electricity.

4. There is no easy answer to this. Which approach encourages more electricity providers to move to renewables? That is hard to say. Every solution has its downside. I decided while writing this I don’t actually care who pays. As long as carbon is reduced.

I started out thinking Turnbull was just using the excuse “as long as it works who cares?” but I have moved to the view that it doesn’t matter. All carbon reduction schemes move the cost onto the users (of course). There are many subtleties in this argument. I personally think a Cap and Trade system is the best because in a lot of ways it is more transparent. But in the end, as PM Turnbull says who cares, as long as carbon is reduced. Presumably as long as that is what really happens, eh?

When you are about to undertake some activity, how often do you typically question what you are about to do?

If you are like me, typically you’ll just “Do it” (to quote one of Ben Stiller’s screen characters), but occasionally you’ll take the time to plan and reflect on how you can optimize what you are about to do.

We have been taught that when faced with an activity or a challenge we need to frame the problem, dissect the problem, plan a solution (if we are really clever, collaborate) and then implement. But what do we do when the problem is poorly understood, or if we can’t get the answers we need upfront? Pretend we know everything anyway? Give up? Have a stab and hope for the best?

In the context of doing business, Ries’ best-seller Lean Startup presents a systematic approach to dealing with this situation in business.

This book is part of a general trend to update traditional approaches to business management to accommodate the uncertainty and pace of change which new technology has created – which covers product, service and new capability development in most businesses today.

Ries sees the method he presents as a scientific approach to doing business that updates and complements the ideas presented in Frederick Taylor’s 1911 classic the Principles of Scientific Management (which championed the importance of analysis, planning and task specialization in business management, and influenced corporate legends like Henry Ford and Alfred Sloan).

Ries is by no means the first to do this. In any discussion on Startups today we take for granted concepts such as “disruptive technologies” and “disruptive innovation”, which have become part of our common language since Clayton Christensen wrote about them in his best-sellers The Innovator’s Dilemma and The Innovator’s Solution. And, as the name suggests, the practices of Lean Startup are to be understood in the context of the Lean approach to business process management, as pioneered by Toyota in manufacturing (which among other things challenged the assumption that optimal process engineering involved linear chains of specialised functions). Also, Lean Startup is closely related to software development practices such as Agile (with its iterative and disciplined approach to development involving continuous feedback and learning loops, as opposed to the Waterfall one-shot “gather requirements, design, build, deploy” approach) and Continuous Deployment (a process whereby all code that is written for an application is immediately deployed into production).

The basic ideas of Lean Startup, however, can be explained without references to these developed software and business management practices, and Ries does this in a simple, powerful and readable way.

Ries’ book is written primarily from the lens of a startup (which typically has to navigate extreme uncertainty with very limited resources); but as he makes clear the principles and methods are applicable to large enterprises, especially those that need to adapt to changing circumstances and operate in uncertainty in a cost-constrained manner.

Lean Startup comes from the perspective that the problem is not whether we can build or create a product, service or capability—we’ve become pretty good at building things that are well defined (perhaps part of the problem is that we’ve become so good at this); but rather the problem is what exactly should we build or create—which requires us to answer more deeply why we should create or support the things we are committed to, and question the assumptions that have been driving what we have been delivering to date.

So while many past business process management principles addressed the problem of how to optimally execute or produce and deliver a well-understood product or service, the problem Ries is solving is how a business operating in some degree of uncertainty can simultaneously explore, learn, build and service to maximise expected future value creation and/or growth in a resource constrained context.

The solution he presents deeply embeds the experimental method into the management process. In a nutshell, when developing, modifying or maintaining a product, service or capability, Lean Startup suggests we should proceed as follows:

explicitly identify the assumptions driving the need (opinion is not fact)

pick a key assumption yet to be validated

create a set of metrics designed to validate and explore the assumption

design a ‘Minimum Viable Product’ (MVP), which might be a change or an enhancement to the existing capability, that will allow us to obtain the desired metrics to test the assumption

build and deploy the MVP

collate the metrics

review the validity of and re-consider the assumptions and what is being developed

repeat

This gives rise to the mantra ‘Build-Measure-Learn’ repeated throughout the book.

This feedback loop may sound like a recipe – but Ries points out that this framework is far from a recipe. Many of the steps above require critical thinking, context specific insight, brainstorming and in some cases courage.

On the point of courage, at the end of each loop there is a critical decision to be made which Ries describes in terms of having to choose whether to persevere or pivot. Pivoting involves “a course correction designed to test a new fundamental hypothesis about the product, strategy, and engine of growth”. Under Lean Startup, pivoting is not considered as failure (involving change of management, say), but rather a necessary and important part of doing business. Not pivoting enough before the startup (or project) capital runs out is typically the cause of failure.

This gives rise to the concept of startup time as opposed to calendar time. Ries notes that typically to measure how long a startup has left we take the capital left (e.g. $1mio) and divide by the burn rate ($100k per month) to get the answer (10 months); but an alternative measure, which may tell us something more about the likelihood of the startup’s success, would be to estimate how many Build-Measure-Learn loops or possible pivots the startup could perform before running out of capital. The central practical message of the book is that the faster a startup can get through a Build-Measure-Learn loop, the more it can learn and thus the greater the chance it will succeed before funding runs out.

What is learnt is obviously a function of both the questions asked as well as the way they are answered. In terms of the answers, a key distinction Ries draws is between what he calls vanity and actionable metrics. Vanity metrics (e.g. gross turnover, gross profit) are lagging indicators that tell businesses what they want to hear (until they don’t), and do not provide information that can be used to make constructive changes. Instead of focusing on these, Ries puts forward the concept of actionable metrics which are designed to answer questions about what is actually driving customer behaviour, turnover, cost, profitability etc. For example, actionable metrics on customer behaviour might give data on how the customer joined, what was their first experience, why they are leaving or being retained. As the name suggests, they provide insight into what needs to be changed to create more value and/or growth (and obviously should be used in any business, regardless of its size or maturity).

Perhaps one of the biggest challenges Ries’ asks (of anyone running a business) is to assess yourself not in terms of the quality of the products or services you have produced, and not even in terms of the growth or profitability you have achieved to date, but to assess yourself in terms of how much you have learnt about what is driving your customers, your costs, your profitability, your growth etc. To genuinely adopt this perspective would obviously require a radical and courageous mindshift for most managers.

How the Lean Startup method can be applied in a mature, large, complex business is not something Ries spends time on (Furr and Dyer’s The Innovator’s Method: Bringing the Lean Startup into Your Organization spends more time on this question). Even though this is a non-trivial problem, it would seem even in the context of a business unit that is focused on execution and optimization (as opposed to innovation), there is scope to apply Lean Startup methods. I say this because I believe there is a degree of uncertainty (and thus the need for learning) in just about all business areas. For example, in the NPR podcast From Harvard Economist To Casino CEO (which was brought to my attention by Mark Lauer quite some time ago), Gary Loveman describes his use of randomized experiments (e.g. A/B testing) in an established casino to understand what customers liked, what they didn’t, what would make them come back if they lost a lot of money one night, etc. (Gary Loveman was well-known, amongst other things, for recognizing the value of the repeat slot players over the high rollers.)

After reading Ries I found myself asking what the implications were for (business) strategy. It is often said that strategy is easy and implementation is the hard part. Nevertheless, there is still the myth of the business leader (read Steve Jobs) that had the strategic initiatives that guided the company exactly where it needed to go. But these types of strategic initiatives are typically just informed, inspired, or lucky guesses. If, however, a business leader can orchestrate the activities of their organisation so Lean Startup principles work concurrently along with all the other business management practices needed to effectively run their organization, in theory the strategic initiatives should evolve, accumulate, be generated by and selected for as a result of the way that the organisation operates and does business (read Build-Measure-Learn loops); with bottom-up (generative) and top-down (guiding, co-ordinating) forces connected by their own feedback loops.

Ries’ book is considered by many as a must read for anyone wanting to start up a business (making a couple of the Forbes top entrepreneur and business book lists in 2014); and no doubt will be on the reading lists (if it isn’t already) of many business managers in larger organizations that need to grapple with change and innovation. It’s also a good read for anyone who is interested in what’s going on “out there” at the moment in the land of entrepreneurs and business management theory. But I think part of the reason why it resonated so strongly for me (in addition to the practical value it has for my work) was that the book is written in such a simple and powerful way as to imply applicability and meaning more broadly than for business.

The importance of feedback and cycles in the Lean Startup approach should be obvious. Mathematicians, scientists, engineers and the military have long recognized the importance of feedback as a way of dealing with uncertainty (going back to Norbert Wiener, the originator of cybernetics). In fact, Ries mentions that the Build-Measure-Learn feedback loop owes a lot to ideas from manoeuvre warfare, in particular, John Boyd’s Observe-Orient-Decide-Act Loop. But even though these ideas have been explored formally for well over a century (and, no doubt, millennia informally), it feels like we have still a long way to go in understanding the role of cycles in nature. For instance, in 2011 the Edge asked a number of prominent thinkers to answer ‘what scientific concept would improve everybody’s cognitive toolkit’. Daniel Dennett’s response (which in my opinion was one of the most thoughtful responses the Edge received to the question) was the concept of cycles. As he ended his response: “a good rule of thumb, then, when confronting the apparent magic of the world of life and mind is: look for the cycles that are doing all the hard work”.

Fundamentally, Lean Startup is a study in how to deal with the unknown—both “known unknowns” through experimental design and measurement as well as (as much as is possible) “unknown unknowns”, through the process of continuous experimentation and exploration. In his 200 m.p.h. (and very readable) book Sapiens: A Brief History of Humankind, Yuval Harari asks the question ‘what potential did Europe develop in the early modern period that enabled it to dominate the late modern world?’. He makes the claim that (all the good arguments of Jared Diamond’s Guns, Germs and Steel notwithstanding) one way to understand Europe’s ability to expand and dominate was in terms of its approach to the unknown, as can be seen through the development of maps. He notes that before the fifteenth century unknown or unfamiliar areas were simply left out of maps, or filled with imaginary monsters and wonders. “These maps had no empty spaces… During the fifteenth and sixteenth centuries, Europeans began to draw world maps with lots of empty spaces—one indication of the development of the scientific mindset, as well as of the European imperial drive.” I would like to know (from someone familiar with this part of history) whether the European nations that were more successful at world domination were those that were in some sense able to more quickly and more effectively cycle through Build-Measure-Learn loops.

So, on reflection, the main message I took away from Lean Startup was not something specific to just business. Rather it was the reminder that no matter how much work we do to create certainty, the unknown is all around us—and that there are more and there are less constructive ways to engage with it.

It’s hard to believe that a whole year has passed since I last wrote on the topic of bitcoin, and my remaining 1 bitcoin is worth rather less than it was back then. During the week I presented at the Sydney Financial Mathematics Workshop on the topic of bitcoin, taking a rather more technical look at the mechanics of the blockchain than in my previous posts here on the Mule. For those who are interested in how Satoshi Nakamoto solved the “double spend” problem, here are the slides from that presentation.

As part of my preparation for the presentation, I read Bitcon: The Naked Truth About Bitcoin. If you are a bitcoin sceptic, you should enjoy the book. If you are a Bitcoin true believer, you will probably hate it. It is over-blown in parts and gets a few technical details wrong, but I am increasingly convinced by the core argument of the book: the blockchain is an extraordinary innovation which may well change the way money moves around the world, but bitcoin the currency will prove to be a fad.

Many older Australians have ridden the magic carpet of high levels of inflation which brought asset valuations to today’s levels. This has been particularly felt in the property market which has been the foundation for most of the “unearned” growth in asset base for anyone aged 50 or older. Property has been the asset which we have been most comfortable to leverage at incredibly high multiples.

Downsizing has liberated much of this unearned wealth and turned it into retirement income. This transfer is much like Potential Energy being transferred into Kinetic Energy. As with physics there is no perpetual motion machine so the transfer is permanent for those who do it. It is however also true they do continue to store some of the liberated KE but not into the illiquid high ticket indivisible item that the large family home generally represents. It is usually reinvested into different asset classes.

Although investing is a core competence for some, (certainly not this author!) normal people with money have found good clips of that money fall into their lap by having lived somewhere or having contributed to super. They have been comfortable in property because it “always goes up” and over their lives they have traded it as little as twice. Reinvesting the nest egg is a massive step.

Some commentators have made very strong cases for being heavily invested in risk assets post retirement whilst others have argued that timing of shocks can have a massive and unexpected effect on post retirement incomes. Both are right of course but the big impact that seems less understood it the massive shift in post-retirement income from post-paid to pre-paid and how that has fundamentally changed the return equation.

Rates of ReturnOnce pre-paid retirement hits its straps the clamour for return creates a dynamic associated to the paradox of thrift. As the population ages and demographic analysis promotes the concept that the welfare safety net needs to be drawn tighter, government services are reduced. The need to build a safety net for ourselves drives our return expectations lower and lower as the “best” assets (like bonds and bank shares) are bid upwards and the marginal assets assets (including higher leveraged companies and marginal property assets) benefit from that bid due to a crowding in effect. The impact of this trend has been seen most clearly in the global bond markets.

30 years ago when I started as a foreign exchange and interest rates trader the US 30 year bond was the bellwether for the health of the financial system. It was highly volatile and its movements reflected the broad market’s view of the capacity for the US to manage its (and therefore the world’s) economy. It seemed strange to me at the time that an instrument that was the projected average fed funds rate over the next 30 years would have any movement at all that related to the near term health of the economy.

Its volatility existed because in 1985 most retirement incomes were funded by the issue of that bond and others like it (by other governmental authorities) or by corporate debt in the case of corporate pension providers. Most defined benefit schemes were not close to fully funded so debt financed the pension provider’s obligations.

Chart 1 – US 30 year Treasury yield Source: Bloomberg

I wish I was smart enough to have bought a zero coupon 30 year US Government bond back then. It would have smacked me in tax over the 30 years, but I would be getting back 17.5 times the money invested this month. As a comparison the US stock index the S&P 500 is up by a factor of 11.7 times (unfair direct comparison because it is not tax adjusted).

These returns happened because the bond market was pricing way too much inflation and the equity market benefitted by there being just enough.

The dynamic in 2015 is the almost total reverse. Equity markets have lofty valuations underpinned by mediocre revenue growth, capital buy backs (as the companies can’t use the capital themselves) and bond yields that are ridiculously low as pre-paid retirement drives yields lower and lower in concert with global government policy of zero rates and Quantitative Easing (QE).

There is little doubt that it is appropriate for governments around the world to try to influence capital to take risk in the current environment. The paradox of thrift has driven risk aversion even further than the salutary lessons of the global financial crisis.

The investment profile of most companies has gone defensive with little entrepreneurialism and widespread equity buy backs. This lack of capital formation sees equity markets continue to rally on flows not earning. Consequently investors have gone massively short volatility –and has done so with one overriding reason near total absence of inflation expectation.

InflationGordon Gekko said “greed is good”. If greed is good and it is fed by a healthy inflation expectation. Inflation has a musky quality, like a magnificent Burgundy it needs to have a little funk, but get too funky and it spoils everything. No funk and you have strawberry cordial. Current markets are strawberry cordial and they are thus by design at the government level reacting to fear still holding the upper hand in the zeitgeist. For the next generations’ sake let’s hope we get some fear back.

Most Baby-Boomers and older have experienced the best fortune inflation can bring you. Liabilities that are nominal in nature against real assets (property and equity) are able to bring massive compounding benefits. As wages grow to match inflation (and employees advance through the ranks) the liabilities whittle away into nothings. Those conditions allowed us to regurgitate the old saying “it’s not timing the market it’s time in the market”. History is a great indicator of history, but absent inflation and with an incredibly long period of defensiveness from a capital formation standpoint it seems ever more likely that the current and next phase of markets will look like little else that has gone before.

In the last two years the Australian Index has increased circa 18% which certainly gives the lie to this argument. That suggests that the drive to low returns is a long way from over, keeping the bid in the equity market strong. It is this authors’s contention that as over 9% of that growth has occurred since the RBA decided the Australian economy was fragile enough to require a rate cut to a level not seen in my lifetime, in fact we are solidly in the execution phase of this return compression. Those of us lucky enough to have money to invest should do so now in any asset with moderate leverage and a high yield.

Once the compression of yields is more complete, the market will roll down one of three clear but quite different paths:

Inflation returns moderately and gradually and allows the central banks around the world to very very slowly unwind the extraordinary accommodation so that the dividend discount model is basically unchanged (i.e. dividends rise as fast as the need to raise rates to combat overstimulation). This path is technically known as Nirvana and we all get to retire rich.

Inflation does not develop for some time meaning returns remain bid down and bond markets globally provide savers with approximately zero income driving investors into earning whatever they can from “real assets”. This is a great outcome for those already invested as they benefit from the compression in returns and their living expenses remain low. The paradox of thrift keeps returns low as fear remains in the system and lack of confidence provides negative feedback loop on inflation and fuels currency devaluation wars. This path is technically known as “the Baby Boomers stealing food from their children’s (and grandchildren’s) mouths.”

Inflation takes some time to develop but when it does it takes a classical monetarist predicted path and smashes valuations very hard as rates back up markedly to try to not just reverse the accommodation but put the brakes on rampant price indiscipline. This path is technically known as “Timing the market has never been so important”

Interestingly path 3 is probably the best outcome for a youngster without much yet in the market. They may have leveraged a bit and after the valuations adjustment works through they get a higher wage and the absolute (not real) level of their assets recovers based on the higher cashflow brought by inflation. Anyone who doubts this should think about their own personal balance sheet in 1973.

The Balance SheetWhen retirement was provided by either a defined benefit scheme or government pension (especially pensions for the government) the issues of timing were completely irrelevant and the investment landscape was also largely irrelevant. Many firms’ pension schemes were “underfunded” and the government did not recognise future liability at all in the budget, only the current FY expense. Someone else’s balance sheet took all the variability. This all changed once governments realised that the unfunded liability would cripple them (admittedly rating agencies had a big role to play in helping them realise this). Post 1987 crash company balance sheets also began to recognize the potentially life threatening exposure that they were taking to equities via their pension schemes.

S&P estimates that the anticipation of quantitative easing in Europe squashed bond yields so much that the liabilities of defined-benefit pension plans rose by up to 18 percent last year. Its analysis looked at the top 50 European companies it rates that have defined-benefit pension plans and are “materially underfunded,” meaning, the plans have deficits of more than 10 percent of adjusted debt, and that debt is more than 1 billion euros. In 2013, liabilities outstripped obligations for that group by more than 30 percent on average.”

Moves to defined contribution and superannuation guarantees are not localized Australian issues. The world has shifted and as Chart 1 shows one key outcome has been that there is more money to be potentially invested for 30 year debt-like returns than there are creditworthy borrowers who want the money.

Companies that switched to “Liability Driven Investments” to fund their pension schemes more than 7 years ago are less vulnerable. These shortfalls will force many unprepared companies to play catch up in their asset allocations.

Variability is much harder to take in a personal balance sheet when external income is no longer being received (i.e. when you are retired). It seems that extreme variations in equity markets is an inevitable consequence of the current reach for yield unless world economic growth has a strong and sustained recovery that outweighs the downward pressure on valuations from the consequent increase in bond yields. In the case of Japan, time in the market has not been your friend:

Chart 2 – Japan’s Nikkei stockmarket indexSource: Bloomberg

I have actually been generous in this chart as the vertical axis starts well after the 38,915 peak in 1989. It is a dangerous assumption that markets will behave differently in the future than they have in the past, but perhaps this chart shows an economy operating a little like the new normal for the last 20 years. It is also interesting to note the massive rally over the past 12 months has been driven by QE.

Timing of that market would have been one of the most lucrative investments possible and funnily enough it was completely predictable and transparent.

ConclusionThe paradox of thrift has usually been applied to emerging economies where very few social services are supplied by the state. The aging of the population combined with the shift to pre-funded retirement in an environment where social services are being pared back is creating this phenomenon in the advanced economies. This is potentially the most egregious form of intergenerational theft.

The associated absence of inflation will also tend to remove the fantastic wealth building effect of unearned capital appreciation primarily through property. This source of wealth for over 50s may be replicated by modern young parents but the scale of success that older folk have had seems unlikely.

In all but the Nirvana case outlined above the outcome seems clear. The retirement age may stay where it is but the size of the pension relative to retirement income expectations will continue to deteriorate as pension growth does not keep pace with lifestyle. People will have little choice but to continue some form of labour-driven income generation into their late sixties and most likely their 70s. Our personal balance sheet which now bears the risk will demand it.

A set and forget equity portfolio may work but also lead us into a very active post retirement game of catch up. Those with no nest egg may struggle hard to get a retirement savings pool that allows them to leave employment until well into their 70s and further may be subject to violent valuation adjustments.

Last year I wrote on a couple of occasions about the Sleeping Beauty problem. The problem raises some tricky questions and I did promise to attempt to answer the questions, which I am yet to do. Only last week, I was discussing the problem again with my friend Giulio, whose paper on the subject I published here. That discussion prompted me to go back to the inspiration for the original post: a series of posts on the Bob Walter’s blog. I re-read all of his posts, including his fourth post on the topic, which began:

I have been waiting to see some conclusions coming from discussions of the problem at the Stubborn Mule blog, however the discussion seems to have petered out without a final statement.

Sadly, even if I do get to my conclusions, I will not be able to get Bob’s reaction, because last week he died and the world has lost a great, inspirational mathematician.

Bob was my supervisor in the Honours year of my degree in mathematics and he also supervised Giulio for his PhD. Exchanging emails with Giulio this week, we both have vivid memories of an early experience of Bob’s inspirational approach to mathematics. This story may not resonate for everyone, but I can assure you that there are not many lectures from over 25 years ago that I can still recall.

The scene was a 3rd year lecture on Categories in Computer Science. Bob started talking about stacks, a very basic data structure used in computing. You should think of a stack of plates: you can put a plate on the top of the stack, or you can take one off. Importantly, you only push on or pop off plates from the top of the stack (unless you want your stack to crash to the floor). And how should a mathematician think about a stack? As Bob explained it, from the perspective of a category theorist, the key to understanding stacks is to think about pushing and popping as inverse functions. Bear with me, and I will take you through his explanation.

Rather than being a stack of plates, we will work with a stack of a particular type of data and I will denote by X the set of possible data elements (X could denote integers, strings, Booleans, or whatever data type you like). Stacks of type X will then be denoted by S. Our two key operations are push and pop.

The push operation takes an element of X and a stack and returns a new stack, which is just the old stack with the element of X added on the top. So, it’s a function push: X × S → S. Conversely, pop is a function S → X × S which takes a stack and returns the top element and a stack, which is everything that’s left after you pop the top.

So far, so good, but there are some edge cases to worry about. We should be able to deal with an empty stack, but what if we try to pop an element from the empty stack? That doesn’t work, but we can deal with this by returning an error state. This means that we should really think of pop as a function pop: S → X × S + I, where I is a single element set, say {ERR}. Here the + is a (disjoint) union of sets, which means that the pop function will either return a pair (an element of X and a stack) or an error state. This might be a bit confusing, so to make it concrete, imagine I have a stack s = (x1, x2, x3) then

pop((x1, x2, x3)) = (x1, (x2, x3))

and this ordered pair of data element x1 and (shorter) stack (x2, x3) is an element of X × S. Now if I want to pop an empty stack (), I have

pop(()) = ERR

which is in I. So pop will always either return an element of X × S or an element of I (in fact, the only element there is).

This should prompt us to revisit push as well, which should really be considered as a function push: X × S + I → S which, given an element of X and a stack will combine them, but given the single element of I will return an empty stack, so push(ERR) = ().

The key insight now is that pop and push are inverses of each other. If I push an element onto a stack and pop it again, I get back my element and the original stack. If I pop an element from a stack and push it back on, I get back my original stack. Extending these functions X × S + I ensures that this holds true even for the edge cases.

But if push and pop are inverses then X × S + I and S must essentially be the same—mathematically they are isomorphic. This is where the magic begins. As Bob said in is lecture, “let’s be bold like Gauss“, and he proceeded with the following calculation:

X × S + I = S

I = S – X × S = S × (I – X)

S = I / (I – X)

and so

S = I + X + X2 + X3 + …

The last couple of steps are the bold ones, but actually make sense. The last equation basically says that a stack is either an empty stack, a single element of X, an ordered pair of elements of X, an ordered triple of elements of X and so on.

I’d known since high school that 1/(1-x) could be expanded to 1 + x + x2 + x3 + …, but applying this to a data structure like stacks was uncharted territory. I was hooked, and the following year I had the privilege of working with Bob on my honours thesis and that work ultimately made it into a couple of joint papers with Bob.

I haven’t seen Bob face to face for many years now, but we have occasionally kept in touch through topics of mutual interest on our blogs. While I have not kept up with his academic work, I have always considered him more than just a brilliant mathematician. He was a creative, inspirational, radical thinker who had an enormous influence on me and, I know, many others.